Tuesday, March 31, 2009

A Thrift Savings Plan (TSP) Investment Strategy For Today's Bear Market (Assuming You Want to Keep Skin in the Game.. Meaning Participate in Stocks)

If you have the urge to participate in the stock market, but want to minimize your risk, then consider reading the email below. It was sent to a friend of mine that I openly discuss the stock market with.

My email sent earlier today:

"Here's some guidance for you if you want to be a participant in the stock market.

(for Paul... The G-fund, referenced below, is the government 401k index that approximates the 30 year treasury).

This is my current guidance so long as the dow jones 200 day moving average is sloping downward. I intend to use the formula discussed below if the Dow jones drops below 6700 and there is no new significant "BAD" news in the market. This last stipulation is subjective. For the time being, I will keep my contributions restricted to the G-fund and will reallocate my TSP account twice per month after starting to use the below formula. I will cease using this model whenever the 200 day moving average on the dow jones industrial average slopes upward.

Additional details to understand about TSP:
- you are authorized to move funds between the G-Fund and other equity/bond funds up to two other times per month
- also, TSP account holders are able to do unlimited moves from equity funds to the G-fund (this is important if the stock indices rocket up like they did these past two weeks. If that occurs, you can start taking some profits off and move them to the G-fund if you like).
- naturally, your monthly contribution allocation will determine what percentage goes to each of the investment options.

The below formula is developed (a big SWAG by me) using the short term lows for the Dow Jones industrial average over the 1990s and plotting them against what I construe as reasonably safe percentage amounts to invest in equities. How did I determine what are "safe" percentages to invest in the stock market? I assumed that the lowest the dow jones could go is 4100. If it did, I would want any losses experienced by my position in equities to be completely offset by gains I make in the G-fund to give me a net return of approximately ZERO.. then fitting an exponential curve to the plot you get:

Net percentage invested in TSP equities = 12.667 * e ^ - 0.0007 * dow jones average

where e is the exponential function on your calculator roughly equal to 2.72

Using today's closing price for the dow you get:

Percent in TSP equities = 12.667 * 2.72 ^ -.0007 * 7522
Percent in TSP equities = 12.667 * 2.72 ^ - 5.2654
Percent in TSP equities = 6.52
Percent in TSP equities ~ 7%

If Dow hits 6500
y = 12.667 * 2.72 ^ -.0007 * 6500
y = 12.667 * 2.72 ^ -4.55
y = 13.35
Percent in TSP equities ~ 13%

If Dow hits 6000
y = 12.667 * 2.72 ^ -.0007 * 6000
y = 12.667 * 2.72 ^ -4.2
y = 18.94
Percent in TSP equities ~ 19%

If Dow hits 5600
y = 12.667 * 2.72 ^ -.0007 * 5600
y = 12.667 * 2.72 ^ -3.92
y = 25.07%
Percent in TSP equities ~ 25%

If Dow hits 5000
y = 12.667 * 2.72 ^ -.0007*5000
y = 12.667 * 2.72 ^ -3.5
y = 38.2%
Percent in TSP equities ~ 38%

If Dow hits 4600, percent in TSP equities ~ 51%

If Dow hits 4100, percent in TSP equities ~ 72%

I hope this puts things into perspective for you. Hopefully you'll find this useful in the event you want to participate in the stock market while minimizing potential losses.

Do you know how to get the 200 day moving average on the dow jones? If you click here you'll see a one year chart of the dow with the 200 day moving average highlighted in red.

Wednesday, March 25, 2009

Yahoo! We're Getting our $3680 IRS Tax Refund This Friday! (Includes How We Qualified For The Refund and What We're Doing With It)

I did our household taxes with H&R Block Tax Cut this season and mailed it off at the end of February. I switched from TurboTax to H&R Block's Tax Cut since it was significantly cheaper and just as easy to use, if not easier.

We mail our taxes in since I previously heard, but cannot confirm, that mailed in returns have a lower audit rate than e-filed returns. We are very truthful in our taxes (don't have anything to hide), but prefer not to have the annoyance of an audit.

When I mailed our return in, around February 24th, I included a return receipt request. We received our return receipt with a dated receipt of March 5th. Today, I received notice from my bank that our IRS refund is scheduled for deposit this Friday, March 27th. That's only 22 days for processing of the return, not bad. Had I e-filed I would have expected a 10 day turn around on our refund.

We got such a huge refund because of three primary reasons:

(1.) We took a beating on one of our rental properties. We had to evict a dead beat and make just over $16k in repairs to the property. The property went unrented for nine months!!

(2.) I accrued nearly a month of tax free leave when I worked in Afghanistan. I waited until 2008 to use most of this leave. Unfortunately, my pay was processed incorrectly and I was fully taxed for this leave... I was due for a credit on my taxes.

(3.) 2007 Stimulus Plan carryover. Our household qualified for the second half of the 2007 stimulus "check" plan on our 2008 taxes.

So, what are we doing exciting with this money??? I'll take my wife out to eat and maybe go to a movie. We typically eat out once a week.... LOL, we'll splurge and eat out twice. =)

Other than that, I just increased our scheduled mortgage payment on our investment property that has a 5.875 percent, 30yr fixed to include an additional $3500 paid to principal. We bought this house just over four years ago for $86,800 and it was immediately appraised for $97k. The house should be paid off by October of this year. Afterwards, we will be in a 10 month window awaiting a move to my next military duty station. During this time frame, we'll likely sell my 1998 Acura 2.3CL and buy a replacement car. We won't buy a new or used car though until I find out where we're going next and determine my future commute. I'm tentatively looking for orders to Colorado Springs, CO; Newport, RI; Arlington, VA or Millington, TN. All four of these locations have a location within 30-95 miles away where my wife can laterally transfer to (within her job). In all cases, we'll be moving close to where my wife's job is and i'll bear with the commute.

Tuesday, March 24, 2009

Lenscrafters Gave My Wife a $48 Discount on Contact Lens Eye Exam

Some good and bad news for my household. About two weeks ago we got a letter from our insurance provider stating that the full cost of my wife's eye exam at Lenscrafters was being applied to our annual deductible... Meaning, we had to pay the entire bill.

Now the good news, a week later Lenscrafters sent us a letter telling us what we already knew (that our insurance provider wasn't paying). However, Lenscraftes would give us a $48 credit if we paid the remaining $98 of the bill within the next ten days.

Count me in, I went in and paid today.

Friday, March 20, 2009

Barack Obama on Tonight Show (The Video)

If you're like me, you turn in a bit too early to catch the Tonight Show. Last night's Tonight Show was significant in that our Commander in Chief, our President, was on the show. I just finished watching it and found it rather refreshing to see our President in this more relaxed/comic format.

Jay Leno's monologue has a lot of comments about the economy. The President talks about the economy as well. You will have to advance the video to 13:39 if you prefer to skip the monologue.

The President is then followed by Garth Brooks performing the song "Rodeo" from his Greatest Hits CD.

Saturday, March 14, 2009

Reducing My Dividend Reinvestment Plans (DRIPs): I Just Placed Order To Sell My Home Depot (HD) Shares

Bottom Line: I have just sold my Home Depot DRIP position and should get a check for about $1200 in the near future. Eventually, i'll plow this money back into Lowes after waiting 30 days.

I have carried both Home Depot and Lowes dividend reinvestment plans (DRIPs) since 2003. I bought into both DRIPS because I was optimistic about the housing boom. My buy and hold philosophy only holds to my DRIP portfolio.

I have a total of 24 DRIPs. I have found that having this many DRIPs is a bit too much. I initially thought that having so many DRIPs would give me plenty of stocks to track and dollar cost average into whenever a minority of them are in the dump. It never crossed my mind of having all of the stocks in the dump (heavily sold off). These 24 DRIPs have become annoying for me during my military moves. It isn't fun when you have to call all of your financial accounts and change your address every two years or so.

With exception to selling a partial Exxon Mobil (XOM) position, I have never sold a DRIP. But times have changed. I booked net capital gains on my 2008 taxes, but I am now planning on booking stock losses in 2009. I previously thought that one can only book stock losses if they had offsetting capital gains. That's false. According to Turbotax:

"Loss harvesting involves selling investments like stocks and mutual funds to realize losses. You can then use those losses to offset any taxable gains you have realized during the year. Losses offset gains dollar for dollar.

And if your losses are more than your gains, you can use up to $3,000 of excess loss to wipe out your tax bill on other kinds of income, such as your wages, savings interest or rental income." Full turbo tax article.

Looking at my DRIP portfolio I find that I have nine top losers (ignoring dividends):

($3004) on Bank of America, BAC
($1008) on Home Depot, HD
($969.88) on Aflac, AFL
($565) on 3M, MMM
($522) on Manitowac, MTW
($447) on Johnson & Johnson, JNJ
($403) on Yahoo, YHOO
($311) on Southern Company, SO
($269) on Lowes, LOW

Of the nine DRIPs, I have specific overlap between Home Depot and Lowes. Home Depot is 50 percent larger than Lowes (by market cap). A closer comparison of the two companies indicates that Lowes has better financials.

I made the decision to sell my Home Depot position after doing a Morningstar valuation review of all of my DRIPs. I found that both Home Depot and Lowes come recommended by Morningstar. I was about to buy more Lowes stock because of its financials and the fact that Lowes does not charge fees on reinvested dividends. I decided to delay increasing my position in Lowes at the last minute. I decided this because I remembered the 30 day tax wash rule (tax wash sale rules). Now, I'll pull the trigger on more Lowes shares in 30 or so days.

Hmm, what about selling my Bank of America and Yahoo DRIPs? I'll hold onto them for the time being. Hopefully Yahoo will get a deal with Microsoft and push the stock higher. As for my Bank of America DRIP, I've lost so much that my position is now only worth $600. I'll have to think a bit more about doing a wash sale on Bank of America. The biggest decision is what stock I'll buy to keep a financial in my DRIP portfolio...

Friday, March 13, 2009

Jon Stewart vs CNBC's Jim Cramer on Daily Show

Here's a great video of Jim Cramer taking his lumps from Jon Stewart.

There are a few references to Jim Cramer early, but the main event (Stewart v. Cramer) can be seen if you advance the video to time 5:30.

Monday, March 09, 2009

Timothy Geithner (not Geitner) SNL Skit. His Cold Open... The Treasury Secretary is Open to Suggestions

Here's a great SNL skit of U.S. Secretary of the Treasury, Timothy Geithner, and his handling of the Federal Stimulus / Bailout program. It has some good lines in the last one-third of the skit.

Shifting Temporarily from Google Adsense to Yahoo Publisher Ads

I'm switching for a short period of time away from Google Adsense to Yahoo Publisher Ads. The switch comes after I logged in one day and saw that Adsense wasn't giving me credit for page impressions. I noticed that I had about 50 visits to this site but Adsense was only giving me credit for 10. I was disgusted. If Adsense wasn't giving me credit for page impressions then could it not be giving me credit for click-throughs?

I already had $41 in my Yahoo Publisher account and need to get $9 in additional ad revenue in order to get paid by Yahoo.

I'm not able to get a good ad color matching scheme with Yahoo so, i'll ultimately switch back to Adsense ads once I'm able to cash out from Yahoo Publisher. Hopefully by then Adsense will have its act together and give me credit for page impressions.

Sunday, March 08, 2009

Today's Stock Market Slide is Even Worse Than That Seen During the Great Depression (Day for Day Comparison Included)

Donald Luskin at Smart Money wrote an article titled "Even Worse Than the Great Depression." The article is critical of the Obama administration's handling of our economy's woes. I'm not interested in the article for this aspect. I'm interested in it because of the chart overlay comparison of the S&P 500 during the Great Depression and today's stock market.

The article states:

As of March 5, "the S&P 500 has lost 56.4% from its all-time highs 513 days ago. At the same point in the bear market associated with the Great Depression, that is at the 513 day mark, the S&P 500 had only lost -- only! -- 49%. In other words, to be no worse than the catastrophe that happened to stocks in the Great Depression, the S&P 500 today would have to rally 17%."

This is troubling information given the fact that during the Great Depression the administration did little to stem the free fall. Yet during this depression our administration is pulling out all the stops trying to stem our economy's free fall.

Continuing with the Mr Luskin's comments: "Looking forward, if stocks are going to continue along the same bleak path they followed during the Great Depression, then I have good news and bad news. The good news is that we're halfway through it. In the Great Depression, the bear market lasted 997 days. We passed that halfway mark two weeks ago... Which brings me to the bad news. By the time the bear market was over in the Great Depression, on that 997th day, the S&P 500 had lost 86.2% from the top. To match that, we'd have to fall another 68.3% from here."

In my 401K i'm bracing for up to a 40% free fall from current stock market levels. I'm thinking hopefully that our government's efforts to throw good money after bad will eventually halt the economy's slide. To brace for a 40% stock market slide, i'll invest no more than 9% of my 401k in the stock market (at its current levels). That way, a 40% loss absorbed by 9% of my 401k equals a loss of 3.6%. Given the fact that the rest of my 401k is invested in government bonds, my net return would be near zero. Meanwhile, a position in the stock market exposes me to some upside if the stock market has a short term rally. If that occurs, I would quickly unwind (sell) any 401k equity (stock) position. I have not yet bought equities in my 401k, but I am now considering switching from 100% govt. bonds to 3% equities when the Dow Jones hits something between 6300 and 6500.

Here's the chart overlay comparison between the S&P 500 in the Great Depression and today. The blue corresponds to the S&P 500 during the Great Depression and the red corresponds to present day.

Over the next 15 months I plan on earmarking roughly $20k in a regular brokerage account for investing in the stock market. This $20k will only be used if the stock market hits a low similar to that of the Great Depression. If that happens, I'll likely set up a simple portfolio of 2, 2.5 and/or 3x bull ETFs, using Direxion and Proshare ETFs. There are no 3x bull ETFs noted on the preceding Direxion and Proshare links. Examples of 3x bull ETFs include: Direxion Dev Mk Bull 3x (DZK), Direxion Sm Cap Bull 3x (TNA) and Direxion Lg Cap Bull 3x (BGU). Conversely, if the market rallied 10-20% from its current levels I would establish positions in 2-3x bear market ETFs. A decent article about Direxion 3x ETFs and their characteristics can be found here at the site "seekingalpha."

A larger chart comparison of the S&P 500 can be found at Luskin's article here.

Friday, March 06, 2009

A Letter I Originally Wrote to Two of My Friends Today About Investing in Today's Market

Here's a letter that I wrote for two of my friends who sometimes ask me for advice/ideas on investing. I got 2/3rds of the way through it and decided that i'd beef it up a little bit with hyperlinks and additional details with the final goal of later posting it to my website. Here's my letter:

I think that these are the following resistance points for the Dow Jones:
6021 (I think that the market will drop to this point)
3708 (I don't think the market will drop below 4100)

If the Dow drops past and closes below any of these points, then it's my opinion that the stock market is saying "lookout below" and the Dow has a chance to proceed to the next lower level. I am not a stock market technician. All I did was look at a chart of the Dow for points where there were significant depressions in the chart indicating selling was high and the chart had a bounce off of a clearly established short term bottom.

By the end of this month, the Treasury's "Stress Test" of major banks will be done. I'm interested in seeing how things pan out. I'm also interested in what the Treasury discloses on or about 23 March in accordance with Fox Business's FOIA info request about emergency loans provided (article link). Also, you might want to pay attention to economic statistics reported on national news. So far, economists are over optimistic and missing the mark on estimates. The easiest stats for you to follow are those related to the unemployment rate. The "nationally reported" unemployment rate for February was originally estimated at 7.9% but actually came in at 8.1%. If you're interested in the real unemployment rate you can click here for a recent article I wrote about the Bureau of Labor Statistics U-6 unemployment rate. Follow my November article's embedded link to the BLS page with unemployment statistics. Also, here's a link to the economic calender, if interested.

My take is that as long as the average economist/statistician is underestimating business stats, then the stock market doesn't yet have the full pain of this depression priced in.

All the best

Sunday, March 01, 2009

U.S. Federal Reserve Sends a Signal to Wall Street: If Private Equity Doesn't Want to Buy Your Subsidiary, We'll Buy It From You

AIG is set to announce the largest ever corporate loss by a U.S. company this Monday which some estimate to be approximately 60 billion dollars. According to a 28 Feb CNNFN report:

"AIG will also give the U.S. Federal Reserve ownership interests in American Life Insurance (Alico), which generates more than half of its revenue from Japan, and Hong Kong-based life insurance group American International Assurance Co (AIA) in return for reducing its debt, the source said."

This purchase of these two companies comes on the heels of a massive debt restructuring for AIG where the Fed gives more favorable terms on the credit line extended to AIG saving the company one billion a year in interest expenses.

The Fed is only keeping AIG on life support. Meanwhile, nobody wants to do business with AIG, further compounding AIG's problems. The Fed needs to decided to either let AIG go bankrupt or without equivocation signal that "The Fed will not allow AIG to fail" by finalizing a take over of the company. In my opinion, if the economy continues on its current track, the Fed will be forced into a FINAL decision within the next 13 months.

Here's the full CNNFN article.